We can only trust that among the changes a new administration will bring is that the next Treasury secretary will prove more adept than Henry Paulson. This is not to say that Paulson's intentions weren't good; they were. But he has been a living reminder that the road to hell is paved with good intentions.

The real problem is that, as illustrated by his handling of TARP, the $700 billion bailout of the banks that has undergone more transformations in less time than any government program ever dreamed up, Paulson embraced the Willie Sutton approach of grab the money first and then worry about what to do with it. That may be fine for robbing a bank, but, as we're seeing, it has rather serious drawbacks when you're striving to keep the economy from capsizing...

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. . .

``This commitment may not be sufficient to keep us in solvent condition or from being placed into receivership,'' if there are further ``substantial'' losses or if the company is unable to sell unsecured debt, Washington-based Fannie said in a filing today with the U.S. Securities and Exchange Commission. . .

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Bloomberg:AIG Gets Expanded Bailout, Posts $24.5 Billion Loss -- American International Group Inc. got a $150 billion government rescue package, almost doubling the initial bailout of less than two months ago as the insurer burns through cash at a record rate.

AIG will get lower interest rates and $40 billion of new capital from the government to help ease the impact of four straight quarterly deficits, including a $24.5 billion third- quarter loss posted today by the New York-based company.

Taxpayers will take on the extra risk to give Chief Executive Officer Edward Liddy more time to salvage AIG. The insurer, which needed U.S. help to escape bankruptcy in September, has posted about $43 billion in quarterly losses tied to home mortgages. Liddy's plan to repay the original $85 billion loan by selling units stalled as plunging financial markets cut into their value and hobbled potential buyers...

discussion:Andrew Ross Sorkin / NY Times:U.S. Provides More Aid to Big Insurer -- The government announced an overhaul of its rescue of A.I.G., after signs that the initial bailout was putting too much strain on the ailing insurer...

Francesco Guerrera / Financial Times:AIG in talks with Fed over new bail-out -- AIG is asking the US government for a new bail-out less than two months after the Federal Reserve came to the rescue of the stricken insurer with an $85bn loan, according to people close to the situation.

AIG’s executives were on Friday night locked in negotiations with the authorities over a plan that could involve a debt-for-equity swap and the government’s purchase of troubled mortgage-backed securities from the insurer.

People close to the talks said the discussions were on-going and might still collapse, but added that AIG was pressing for a decision before it reports third-quarter results on Monday.

AIG’s board is due to meet on Sunday to approve the results and discuss any new government plan, they added.

The moves come amid growing fears AIG might soon use up the $85bn cash infusion it received from the Fed in September, as well as an additional $37.5bn loan aimed at stemming a cash drain from the insurer’s securities lending unit...

“We’ve got the right people in place as well as good risk management and controls.” — E. Stanley O’Neal, 2005

In 2005, firms issued $178 billion in mortgage and other asset-backed C.D.O.’s, compared with just $4 billion worth of C.D.O.’s that used safer, high-grade corporate bonds as collateral. In 2006, issuance of mortgage and asset-backed C.D.O.’s totaled $316 billion, versus $40 billion backed by corporate bonds...

Merrill, the biggest player in the C.D.O. game, appeared to be a cash register. After its banner year in 2006, it produced another earnings record in the first quarter of 2007, finally beating three rivals, Lehman, Goldman Sachs and Bear Stearns, in profit growth.

But as 2007 progressed, the mortgage business began to fall apart — and the impact was brutal. As mortgages started to fail, the debt ratings on C.D.O.’s were cut; anyone left holding the products was locked in a downward spiral because no one wanted to buy something that was collapsing. Among the biggest victims was Merrill.

In October 2007, the firm shocked investors when it announced a $7.9 billion write-down related to its exposure to mortgage C.D.O.’s, resulting in a $2.3 billion loss, the largest in the firm’s history...

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The New York Review of Books:George Soros: The Crisis & What to Do About It -- The salient feature of the current financial crisis is that it was not caused by some external shock like OPEC raising the price of oil or a particular country or financial institution defaulting. The crisis was generated by the financial system itself. This fact—that the defect was inherent in the system —contradicts the prevailing theory, which holds that financial markets tend toward equilibrium and that deviations from the equilibrium either occur in a random manner or are caused by some sudden external event to which markets have difficulty adjusting. The severity and amplitude of the crisis provides convincing evidence that there is something fundamentally wrong with this prevailing theory and with the approach to market regulation that has gone with it. To understand what has happened, and what should be done to avoid such a catastrophic crisis in the future, will require a new way of thinking about how markets work....

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P.J. O'Rourke / Weekly Standard:We Blew It — A look back in remorse on the conservative opportunity that was squandered. -- . . . . And now, to glue and screw the lid on our coffin, comes this financial crisis. For almost three decades we've been trying to teach average Americans to act like "stakeholders" in their economy. They learned. They're crying and whining for government bailouts just like the billionaire stakeholders in banks and investment houses. Aid, I can assure you, will be forthcoming from President Obama.

Then average Americans will learn the wisdom of Ronald Reagan's statement: "The ten most dangerous words in the English language are, 'I'm from the federal government, and I'm here to help.' " Ask a Katrina survivor.

The left has no idea what's going on in the financial crisis. And I honor their confusion. Jim Jerk down the road from me, with all the cars up on blocks in his front yard, falls behind in his mortgage payments, and the economy of Iceland implodes. I'm missing a few pieces of this puzzle myself.

Under constant political pressure, which went almost unresisted by conservatives, a lot of lousy mortgages that would never be repaid were handed out to Jim Jerk and his drinking buddies and all the ex-wives and single mothers with whom Jim and his pals have littered the nation.

Wall Street looked at the worthless paper and thought, "How can we make a buck off this?" The answer was to wrap it in a bow. Take a wide enough variety of lousy mortgages--some from the East, some from the West, some from the cities, some from the suburbs, some from shacks, some from McMansions--bundle them together and put pressure on the bond rating agencies to do fancy risk management math, and you get a "collateralized debt obligation" with a triple-A rating. Good as cash. Until it wasn't...

Whenever consumers lock up or gleefully cut up their plastic, their credit scores drop as they have increased their credit-utilization ratio. This ratio is determined by dividing a person's total of outstanding debt by their total available credit. As borrowers' credit lines are closed, either by themselves or by creditors, their utilization ratio increases and their credit score decreases, hence the Catch-22.

Ethan Dorhelm, a senior scientist at the company that calculates credit scores, Fair Isaac Corp. (FICO), is sensitive to this problem. "FICO looks at redeveloping its score and making adjustments every two years, reweighting the FICO algorithm to reflect credit trends in the market," he says. . .